We used to have fun commenting about the bond market, including Treasuries, Mortgages, Municipals, and Corporates. But that was before the dark times. Before deleveraging.
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Friday, August 22, 2008

Merrill Lynch is telling clients that a source within Treasury says they want to keep the GSEs in their current form, as in shareholder owned. That implies no "takeover" any time soon. It also implies that some alternative to a full blown takeover would be the first step.

I'd say that tells me that Treasury buying MBS is very likely in the near term.

What Treasury needs to do is simply give the market a plan. What if they came out and said "If either or both of Fannie Mae or Freddie Mac's capital ratios fall below the regulatory minimums, the Treasury will [insert plan here]" The plan would spell out where the Treasury's investment would be, which would give some picture to all investors in any part of the capital structure.

The market doesn't care what happens to GSE common holders. The market needs some visibility about the possible outcomes.

7 comments:

Finally some common sense. Why on earth would the government want to start running the GSE's and put more burden on the tax payer. Between them the GSE's employ directly or indirectly over 15,000 people - does the government (which is trying to cut internal) costs want to add so many people to its payroll? As I wrote recently , all the GSE beat up is driven more by media hype and fear. It's almost like people want them to collapse. DO they not realize the implications of the GSE's failing would be much worse for the entire market as a whole. I bet over 1000 banks would follow the GSE's to oblivion if they were wound up!

I've read that the regional banks own a lot of the FNM?FRE preferred stock. Yes/No? If yes, what will happen to these banks capital ratios if the preferred is worthless? If yes, it seems that the Fed will not compound the woes of the banking system and let these go to zero.

With this in mind, it seems that these preferreds are a great deal when looking at their current yields. And the promise of a par call at a later date, maybe well after I am dead?

I'd think Treasury will want to maximize the uncertainty for as long as possible, to increase market pressure for a grudging market solution.

I'd say the most likely end-game is a senior preferred issue, convertible into common at a derisory price. There might possibly be a condition in the issue that no dividend will be paid to junior issues (such as the common or the other prefs) for some period of time, or until some fraction of the senior has been converted or (most likely) until some capital adequacy condition has been met.

'Wipe out the preferreds'? I see this all the time, but don't understand the mechanism. How can that be done, without - at the very least - lengthy lawsuits? This would maximize uncertainty, to be sure, but take resolution out of Treasury's hands. Even forced liquidation is more likely than expropriation.

A Thornburg type solution, I suggest, is unlikely because the preferred shareholders could Just Say No.

Politically, the government is not in a position to start running FNE/FRE while leaving the shareholders in place. That would smack to much of a bailout. I can see the headline now: Treasury buys toxic bonds from Fannie Mae, common stock soars.

The only reason the Fed was able to get away with the JPM/BSC shotgun marriage was that they stockholders got essentially wiped out.

Any plan to help the GSE's that does not include the shareholders getting wiped out is a nonstarter.

So nobody wants the GSE's to fail, but unless they do, government cannot exercise the now explicit guarantee.

Hmmm. Let me rephrase the first part of that last sentence. Nobody wants the GSE's to fail with the rational part of their mind, although they would like to see the wreck. It's kind of like watching NASCAR, or a high wire act. You don't really want the guy to get hurt, but the possibility keeps you glued to the spectacle.

2 points:1)Lehman (if at all) ...later this week..it wont be dragged till after sep 2 holidays.neuberger berman goes for $5.5bn and then they get inv banking to run and see total to someone...korean maybe whoever...

2)no gse's till 10th sep or so..dem convn then labor day and then gop convnthen GSEs get funding and mostly broken up

About Me

I oversee taxable bond trading for a small investment management firm. Opinions expressed on this website may not reflect the opinions of my employers. Strategies described here should not be taken as advice, and may not be the strategies being used for my clients. Take this website as the egotistical ramblings of a bond geek and nothing more. E-mail is accruedint *at* gmail.com or find on Facebook.